Bye bye troika, hello financial engineering

Despite the weight of conventional wisdom to the contrary, issues can and do move at high speed within the public sector. On Monday morning, the National Treasury Management Agency (NTMA) prepared to release its annual report. In it, the State's money manager noted ESB was selling two peat power plants in Offaly and Longford to raise cash towards a €400 million dividend for the exchequer, and "the sale process will be completed" later in 2014.

The very same morning, the board of ESB, chaired by veteran investor Lochlann Quinn, was meeting to scrap the sale after consultation with New Era, a silo within the NTMA. The company announced it will keep the plants and instead borrow the remaining €203 million it owes the State.

“It will be financially more beneficial to both ESB and the Government,” ESB said.

The decision to reverse the sale of the power plants’ was clearly taken at speed.

Earlier in the summer in its first post-bailout assessment of Ireland, the European Commission said it expected the sale to proceed, resulting in "the transfer of €200 million" to the Government.

Public levies

In a written answer to Fianna Fáil's Sean Fleming earlier this month by Brendan Howlin, the Minister for Public Expenditure, there also was no hint of the u-turn to come. "ESB is currently finalising [the sale] plans, which is expected to yield a further special dividend in the near future," said Howlin on July 9th.

But the proposed sell-off of the plants, under pressure from the Government, was by now already becoming a sore point for ESB’s unions and also for some within its management team.

ESB engaged Macquarie Capital to test the market for buyers, but it wasn’t good – the carbon-spewing peat plants, supported by a levy on all customer bills to prop up the peat industry, were worth little on the market. “There was no business sense in it, and all the advice confirmed that,” said a source privvy to the company’s thinking.

The public levies are due to run out in about five years, making the two plants particularly unattractive to institutional buyers.

“Whoever bought them would probably eventually have to convert them to burn biomass or something to make a return,” said one corporate finance source. “Unless a buyer was able to do a deal with Bord na Móna [to keep supplying cheap peat], the plants would not be worth buying.”

The sale of the two plants, it was decided, would bring nowhere near the level of cash required. To reach its €400 million target using asset sales, ESB would have had to offload far more than just Lough Ree and West Offaly, potentially sparking a bitter industrial relations dispute. The company began looking for an alternative solution.

A week after Howlin's reply to Fleming, this newspaper reported that following the sell-off of its retail arm, Bord Gáis was preparing to borrow an additional €300 million to pay a State dividend.

ESB, with the Goverment, Macquarie and New Era, quickly settled upon a similar solution for its quandary.

It was calculated that the cashflow from the retained plants could be used to support further borrowings, which would go further towards reaching the dividend target than the proceeds of a sale.

State borrowings

In effect, the Government will now route a half a billion of its own borrowing requirements using the two publicly-owned energy companies as cover.

The exchequer can currently borrow 10-year money at a smidgen above two per cent. Unless Bord Gáis and ESB can borrow for less than this, the effect of the transactions would appear to be of little aggregate benefit to taxpayers.

"The State has a balance sheet and all of its liabilities appear on that anyway. [Routing State borrowings through the energy companies] is only financial tricking around," said one source. However, Alan McQuaid, the chief economist at Merrion Capital, maintains that although the companies wil pay more for the cash than the sovereign, "it will still be cheap money".

“ESB [and Bord Gáis networks] are safe bets on the bond markets. Having them borrow the money also eases the burden of the Government having to find it elsewhere through cuts in public services, for example,” he said.

The State’s improving finances, McQuaid says, mean “the pressure is off” to sell public assets. The official departure of the troika also removes some of the pressure from the Government to offload the family silver. The European Commission wasn’t even consulted over the u-turn on the power plants sales.

“The idea of a fire sale is over. As a Government, you don’t want to be in a position where your big utilities are not under your control,” McQuaid said.

Despite criticism within the media for supposed financial promiscuity, Bord Gáis and ESB have both emerged from the financial crisis as profitable, well-run and much-improved businesses.

Cost-cutting

After offloading its retail arm and its windfarms, Bord Gáis, which is changing its name to Ervia, is revamping itself as a lower-risk infrastructural business incorportaing its gas pipelines and Irish Water.

“The multi-utility concept was received very positively [by the markets],” said a spokeswoman. “We have also secured financing facilities of over €300 million, reflecting the positive sentiment towards the group. We expect Bord Gáis Networks, as a regulated utility, to continue to be attractive. Over time, the same will be true of Irish Water, which will eventually have its own credit rating.” ESB has emerged arguably in even better shape. After implementing a tough and far-reaching cost cutting programme, the company reported after-tax profits last year of €415 million, an increase of €80 million. ESB hopes to add about €1 billion to its annual earnings by 2020, and is also investing heavily in the telecoms market.

It has become difficult for the company to plead poverty when faced with the demands of its unions, which are resurgent after forcing management to backtrack in December in a dispute over pensions.

"The unions would have been a big factor [in the decision not to sell the two peat plants]," said one source. "After ESB sold [in 2008] two other plants in Kerry and Wexford to Endesa, these were later flipped on to SSE (the owner of Airtricity). The unions didn't like that. "

The source added that there is also already disquiet within ESB over the operation of a grey market for staff and ESB pensioners to trade shares in the company that were awarded under an employee share ownership plan. “It is too illiquid and nobody will sort it out for them. It is causing strife,” said the source.

A corporate finance source said union concerns were also on the minds of potential buyers for Lough Ree and West Offaly.

The staff of Bord Gáis who transferred to the private sector buyers of its retail and wind assets negotiated payouts of €4,000 each. Meanwhile, the 900 members of Bord Gáis’s staff share scheme will also receive average payouts of €54,000, after the scheme was bought out to facilitate the sale.

“ESB staff will have looked on in envy as the Bord Gáis staff got everything they wished for. Buyers were concerned that that was setting some kind of precedent,” said the corporate finance source.

It was announced this month that Bríd Horan, ESB’s deputy chief executive, is to leave the company later this year. She earned the chagrin of the company’s unions during the pensions dispute for her perceived tough stance.

John McSweeney, ESB’s head of innovation and another senior executive who was considered to be a hawk by the workers’ representatives, is also retiring later this year, it has emerged.

Profits are growing, the union are happier and the State is off everybody’s back. It’s back to the future for ESB and Bord Gáis.